HOW WILL AMENDMENTS TO THE CONSTRUCTION CONTRACTS ACT AFFECT INSOLVENCY PRACTITIONERS?

In less than a week, amendments to the Construction Contracts Act (CCA) will come into force which are designed to facilitate the payment of retention money to contractors, even in the event of an insolvency.

From 31 March, all new or renewed commercial construction contracts will be required to provide for retention monies to be held on trust or, as an alternative, for the party deducting retentions to provide a complying instrument.

The changes have been contentious. Much of the detail is yet to be resolved.

For insolvency practitioners, the amendments will have a real impact on how they approach insolvent companies holding retentions.

A company does not have any beneficial interest in CCA retentions trust money. This money can’t be used by receivers or liquidators to pay preferential or secured creditors.

Identifying money held on trust for retentions may be difficult. Retention monies are not required to be held in a separate trust account (or even in cash). They can be co-mingled with other funds, or represented by liquid assets readily convertible to cash. If this is the case, how are insolvency practitioners to know, when they are appointed to a company, which funds (or liquid assets) are subject to a retentions trust?

Receivers and liquidators will need to work through a process of identifying which monies or assets held by a company are subject to a trust – and they will be justifiably wary of being a party to a breach of trust by paying out funds without correctly accounting to trust beneficiaries.

Helpfully, companies must keep a record of trust monies – but there is no penalty in the new regime for failing to do so (a trustee may be liable under the common law, however, for any loss caused by poor record-keeping). Insolvency practitioners are used to finding the books of an insolvent company in disarray, but inadequate recordkeeping for trust monies will add time, cost and frustration to an appointment.

The new regime provides an alternative to the retentions trust scheme. If a complying financial instrument (such as insurance, a guarantee or a bond) is used instead of monies held on trust, collected retentions will fall into the pool of funds available to insolvency practitioners to pay creditors.

However, if the instrument is not maintained, the default position is that a retention monies trust kicks in. Insolvency practitioners will need to carefully check the terms of a complying instrument to make sure that it is valid and has been, and continues to be, in force at all relevant times. For example, if a contractor purchases an insurance policy to cover retentions but then fails to pay premiums on the policy, the policy may lapse and a retentions trust comes into play. If a company does not have sufficient funds, there may be no retentions held for sub-contractors. Unhelpfully, there is no regulatory guidance at this stage on what will be prohibited terms for a complying instrument.

If there is a dispute about whether the terms of a complying instrument have been breached or not and the dispute gets litigated, it may be several months before an insolvency practitioner can distribute funds to creditors.

The amendments to the CCA present new challenges for insolvency practitioners when they are appointed to companies that deal with, or have rights to, retention money. However, given that only new or renewed commercial construction contracts are affected from 31 March, it may be some months before practitioners are required to grapple with the issues raised by the new regime.

For their part, lenders will want to check the security that they have over companies that hold retentions, as retention monies will be carved out of funds and liquid assets available to a lender. We expect that the trading banks will be proactive in managing the risks around the new CCA regime and may insist on separate accounts for retentions monies or visibility over the terms of complying instruments.